Government “Living Within Its Means”?

Claims about budget balancing are baloney.

By John Miller

“Government has to start living within its means, just like families do. We have to cut the spending we can’t afford so we can put the economy on sounder footing, and give our businesses the confidence they need to grow and create jobs.”

—President Barack Obama, weekly radio address, July 2, 2011

“If the US was a business, it would be a failing business. That’s the problem. You have to spend less than you make. Business 101."

—Boston-area car dealer Ernie Boch, Jr., quoted in “From some of the richest, two cheers for higher taxes,” Boston Globe, August 21, 2011

Turn on any of the television or radio gab shows and it won’t be long before you hear someone proclaim that government must live within its means just as families do and businesses must.

Barack Obama gave this analogy the presidential seal of approval in a radio address in early July. In August, Ernie Boch, Jr., the Boston-based auto dealership magnate, added his two cents to Warren Buffett’s call to hike taxes on the rich: he would pay more taxes only if the government balanced its budget just as his and every other business must do.

But the truth is neither families nor businesses balance their books in the sense of forgoing borrowing. And even if they did, to insist that government do the same would extinguish whatever remains of economic growth and job creation, not ignite them.

Family and Business Red Ink

Few families balance their budgets the way the guardians of financial rectitude are now demanding of government. Nearly all families spend more than they earn and borrow to do so. When a family takes out a car loan, a student loan, or a mortgage on a house, it’s spending money it doesn’t have.

Is borrowing the road to ruin? Not if the debt is affordable. That depends not just on the size of the debt relative to the income available to service that debt, but also on how the family spends the borrowed money. For instance, assuming the size of the debt is manageable, borrowing to pay for education is justified if the education improves the family’s earning potential and so helps provide the income necessary to service the debt.

The same holds true of businesses. They borrow to invest and operate, especially in the United States where corporations finance the bulk of their investments by borrowing rather than by issuing stock. While exact numbers are not available about the privately held Boch auto dealerships, rest assured that Boch’s company borrows to put the cars on his lot that he sells to the public or to build yet another dealership. That borrowing allows Boch’s and other businesses to spend more than they are taking in—Business 101.

Families and businesses in the United States do quite a bit of borrowing and quite a bit more borrowing than they had in the past. Today families rely on credit to meet their needs—for everything from food to fuel, from education to entertainment, and especially housing. Total household debt stood at 92.5% of GDP in 2010, more than thirty percentage points higher than its level two decades earlier, 60.2% in 1990. And as their debt rose, families shelled out more and more of their income to make payments on that debt. In the first quarter of 2011, household payments on consumer and mortgage debt consumed 11.5% of disposable personal income.

Businesses, too, have increased their reliance on debt to finance their operations. Total debt of non-financial businesses was 53% as great as GDP in 1980, but reached 74.3% in 2010.

Those figures surely put the lie to the claim that families and businesses balance their budgets year in and year out without relying on borrowing to spend beyond their income.

Government’s Red Ink

Still it’s true that federal government debt has increased steadily and rapidly over the last decade as the government has consistently run budget deficits. The ratio of the outstanding debt of the federal government to the country’s GDP rose from 32.5% in 2001 to 62.1% in 2010.

However, payments on that rising debt are less of a burden on the federal government budget than debt payments are on family budgets. The U.S. government can perpetually refinance its debt in ways that are not open to the richest family or the largest business. Its debt burden, then, consists of the net interest payments on its debt, which will amount to 9.5% of federal revenues in 2011. That’s two percentage points less than the proportion of their income that families devoted to making their debt payments—interest payments and payment on the principal—in the beginning of 2011.

Moreover, a good share of federal spending has gone to investments that are aimed at increasing its (and U.S. families’) future income—similar to a household taking out an education loan or a business borrowing to expand its operation. A recent study conducted by the Brookings Institution, the Washington-based think tank, found that in 2008 the federal government spent $253.8 billion on non-defense investments in infrastructure, mostly transportation, research and development, and education and training, all expenditures that will boost the productivity of the economy and help to provide the tax revenue to service the debt. That investment spending equaled a little more than half of the $453.6 billion budget deficit in 2008.

Political Will

The aversion to the federal government deficits and borrowing fostered by pundits and politicians who pronounce that governments must balance their budgets like families and businesses do, even as the economy falters, is not only at odds with the facts. It has made us worse off by blocking government spending just when it is most needed. When family budgets are tight, and spending constrained with so many out of work and with the overhang of mortgage debt, it falls to government to provide the spending necessary to get the economy going. Government spending can put people to work and provide the income that will loosen tight family budgets, so they too can buy what businesses produce.

What’s needed is to reverse the austerity budgets favored by conservative politicians in the United States and Europe today. More government spending and tax cuts targeted at working people, beyond what President Obama has proposed in his recent jobs bill, will surely make the budget deficit yet larger and drive up government debt. But that ratio of government debt to GDP, currently 62.1%, is still far below the 1946 record peak of 109% at the end of World War II, which was followed by the two of the strongest decades of economic growth in U.S. history.

It has happened before, and during even worse economic conditions than today’s stagnation. In a Pittsburgh campaign speech in October 1932, some three years into the Great Depression, presidential candidate Franklin Delano Roosevelt promised that he would slash federal expenditures by 25% and balance the federal budget. But once in office, FDR reneged on his promise to balance the budget and initiated the New Deal. When he returned to Pittsburgh during his 1936 campaign for reelection, FDR declared, “to balance the budget in 1933, or 1934, or 1935 would be a crime against the American people.”

Without massive government spending and without the political will to brand balancing the government budget as a “crime against the American people,” today’s crisis will likely drag on for a decade as economic hardship mounts for more and more of us.

JOHN MILLER, a member of the Dollars & Sense collective, is professor of economics at Wheaton College.